Low Volatility Small Caps Ten small-cap stocks for a low-volatility portfolio
CHR.B.TSX, WIN.TSX, NMI.TSX, FN.TSX, AGT.TSX, GSY.TSX, MAL.TSX, GUY.TSX, CGO.TSX, XTC.TSX
What are we looking for?
Strong small-cap names that fare well throughout multiple market environments, with the focus on stocks exhibiting strong income, growth and momentum characteristics.
The screen
Today's strategy is designed for investors who are looking to enhance their core, stable, low-volatility portfolio with exposure to stable small-cap names. I have used a modified version of the CPMS Triple 5 strategy, by using a combination of factors from its three styles: income, growth and momentum. I focused on the following factors:
• Forward reinvestment rate (a higher rate indicating growth in the value of the company's assets);
• Price-to-forward earnings;
• Three-month analyst estimate revisions (current consensus estimate for earnings per share versus three months ago);
• Quarterly earnings surprise (proprietary measure of the percentage difference between actual and expected earnings) and quarterly earnings momentum (rate of change of quarterly operating earnings per share);
• Expected dividend yield;
• Five-year price beta versus market index (reminder: Beta is a measure of an asset's risk relative to the market - a beta of less than one would indicate the stock is less volatile than the market in general);
• Price change relative to month-end three and six months ago.
Qualifying companies have a market float between $100-million and $1-billion, and value of the volume of shares traded in the past month is no less than $8-million. They also must have a positive price change over three and six months; and a positive (or at least not negative) earnings surprise and three-month analyst estimate revisions.
More about Morningstar
Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we foundI used Morningstar CPMS to back-test the strategy from December, 1991, to February, 2016. During this process, 20 stocks were purchased and equally weighted with five maximum allowable stocks per sector. Stocks would be sold if: they fell outside the top 40 per cent of the ranked universe, the three-month estimate revision dropped by more than 20 per cent, the earnings surprise was worse than negative 10 per cent, or the stock exhibited a strong price drop over the past three and six months.
Over this period, the strategy produced an annualized total return of 23.1 per cent while the S&P/TSX composite total return index advanced 8.1 per cent. Ten stocks that qualify today are listed in the accompanying table.
As always, investors are encouraged to conduct their own research before purchasing any of the investments listed here.
Julie Michaels, MBA, is a relationship manager for CPMS at Morningstar Research Inc.
Thu, 7 Apr 2016 18:30 EDT